Industrial software maker PTC (PTC -0.66%) and work process technology provider Trimble (TRMB -0.33%) are highly attractive long-term growth stocks. But you might not know it from just looking at traditional metrics like revenue and earnings. As is often the case with companies whose sales are changing in nature, it's not always easy to see the underlying growth.

Sometimes, it is necessary to look at other metrics. And after kicking the tires and looking under the hood, it's clear that both of the companies are growing at an impressive pace. Here's why these two stocks are excellent buys now. 

Three reasons to buy PTC and Trimble

Although they are very different companies, the underlying case for buying each stock is similar. I'll flesh out the details below, but the key points in common are as follows:

  • Traditional metrics like revenue and earnings are not the best way to value these stocks, and underlying progress is much more substantial than the headline metrics suggest.
  • The critical metrics for both companies indicate excellent growth, which points to significantly increased cash flow in the coming years.
  • On a price-to-free-cash-flow (FCF) basis, both stocks trade on attractive valuations.

1. The investment case for PTC

PTC offers a range of software products to the industrial and manufacturing sectors. I've discussed the company at more length elsewhere. However, for brevity, the company offers computer-aided design (CAD) and product lifecycle management (PLM) software, alongside newer, higher-growth software solutions, including Internet of Things (IoT) and augmented reality (AR) software.

What unites all these products is the so-called "digital thread" -- a seamless flow of digital information that starts at the design phase (CAD) through the products lifecycle (PLM) and connects the physical asset/product with the digital world (IoT) while augmenting (AR) the asset/product performance. 

Given the considerable productivity benefits that companies generate by adopting digital technology, PTC should have a long runway of growth ahead of it.

As a software company focused on growing its subscriber base to generate future earnings and cash flow, management's preferred metric to measure itself is its Annual Run Rate (ARR). This is "the annualized value of our portfolio of active subscription software, cloud, SaaS, and support contracts as of the end of the reporting period."

More ARR means contracts from which cash flow can be generated. Upfront revenue is not as important as growing the subscriber base for long-term FCF. The table below shows the difference between PTC's estimated revenue and ARR growth in 2023. 

PTC

2022

2023 Estimate

Year-Over-Year Growth

Revenue

$1,933 million

$2,080 million-$2,140 million

8%-11%

ARR at Constant Currency

$1,572 million

$1,920 million-$1,950 million

22%-24%

Free Cash Flow

$416 million

$580 million

39%

Data source: PTC presentations.

FCF is also set to improve notably, and Wall Street analysts forecast PTC will generate $704 million and $872 million in 2024 and 2025 -- implying a 28% compound annual growth rate (CAGR) from 2022. Those are excellent growth rates for a company set to trade at 24 times its FCF at the end of 2024. 

2. The investment case for Trimble 

Trimble's origins lie in hardware used for precise positioning by its customers -- think of geospatial mapping or a construction/infrastructure company needing precise points for a project or a road. 

However, the company's future lies in a combination of hardware, software, and services as Trimble seeks to become an important part of its customers' daily workflow. The data generated by its hardware can be used to analyze, model, and guide a customer's assets.

For example, its agriculture customers enjoy huge productivity gains from using precision agriculture to guide their equipment. In transportation, fleets can be precisely monitored and managed in real-time to optimize routes. Construction projects can be precisely managed to reduce waste and carbon emissions and ensure timely completion.

To assess its growing software and services revenue, Trimble emphasizes annual recurring revenue (ARR). This "represents the estimated annualized value of recurring revenue, including subscription, maintenance and support revenue, and term license contracts for the quarter." It's similar to what PTC guides toward but has a slightly different name. 

However, what it has in common is a much higher rate of growth than its expected revenue growth would indicate for 2023. 

Trimble

2022

2023 Estimate

Year-Over-Year Growth

Revenue

$3,676 million

$3,835 million-$3,935 million

2%-5% organic growth

ARR at Constant Currency

$1,603 million

$2,000 million*

"mid-teens organic growth."

Free Cash Flow

$348 million

$665 million**

91%**

Data source: Trimble presentations .*Wall Street analyst consensus. **Includes ARR from an acquisition.

Similarly, the increased ARR is expected to drop down into FCF (just as with PTC), and Wall Street analysts are expecting Trimble's FCF to be $752 million in 2024 and $909 million in 2025, representing a 17% CAGR from 2023 through 2025. Those figures also mean Trimble would trade on 17.6 times its FCF at the end of 2024. That's an excellent valuation for a stock with such growth.

In conclusion, both PTC and Trimble are growing at a much higher rate than is apparent in their revenue growth, and that's set to drop down into the cash flow generation in the coming years, putting them on favorable valuations.